How 'backwards budgeting' could help you save more
MOST people have tried creating a formal budgeting plan to help manage their personal finances at some point.
Colourful pie charts and complicated bar graphs aside, the minimum prerequisite for a successful plan is the ability to predict future spending.
With vague recollections of half crazed shopping sprees or a chronic inability to estimate a roller coaster like transport budget, many are forced to make a few guesstimates and hope for the best.
Little wonder, then, that these bodged budgets frequently fail.
An alternative: backwards budgeting
That's why we're big fans of an alternative system that we like to call backwards budgeting.
It's much kinder on the mind, getting rid of the guilt of not sticking to a budget limit you agreed in advance by being much more tolerant of shifting spending habits.
Savings statistics show that millions of us struggle to save - this could help.
How it works
A backwards or reverse budget automates saving and spending: as soon as money goes in, a set amount for bills, rent and set savings goals go out, leaving the rest of the cash for day-to-day living.
Essentially, then, it's a way of making sure money goes where it's needed most and a budgeting system that doesn't constantly need to be monitored.
Some people also see it as a way to introduce artificial scarcity to their accessible cash.
By artificial scarcity we mean this: if you know that, day to day when you're not thinking about your budget, you'll just go out and spend the contents of your current account this is a way of stopping yourself, while saving for the things you actually want long term.
'I have a backwards budget: it's called my life'
The above is a common response to this form of budgeting and, it's true, pay comes in, outgoings leave: for many, artificial scarcity is a bit of nonsense. Money is scarce as it is.
But, we think, that's why it works.
It's a common sense way of regulating finances, it's just that instead of money going out and being spent, cash is directed where it can do the most good, towards savings accounts, for example, or repaying debt, with the least amount of effort and pain.
Tips on backwards budgets
Here's how to do it well.
1. Set solid, but realistic, savings goals
The amount of earnings that goes into savings, depends on the goal of the saver. The important thing is that it never falters. Paying is the primary agenda of the reverse budget user, everything else comes after.
Of course, sending £1,000 a month into a savings account isn't viable for those with an income of £1,200 a month.
Those new to the game often start small and review the situation in six months time. Most people will find that they can then up the amount by making small changes in their spending habits.
Find more general tips on budgeting your money here.
2. Set fixed outgoings
Factor in the costs of bills, rent, insurance and other fixed outgoings.
Set up direct debits for all of these things, with the date they come out of your account as near as possible to the date pay goes in (though obviously after).
While spending on electricity, water and gas fluctuates, the utility companies will be happy to provide you with a fixed monthly amount to pay to cover costs. The onus is on them to review this amount if usage changes (more on energy direct debits here).
Those that use public transport to get to work should look into getting a monthly ticket and setting up another direct debit to pay for it if possible.
The National Rail Enquiries site says that, "some train companies may also allow you to spread the cost of the season ticket by paying with Direct Debit."
When, at the start of the month, pay arrives, some of it will be munched up by direct debits and some will be transferred as a set savings amount.
Inevitably, things may be tight as you learn to live with the money you have, and being frugal doesn't always feel attractive or fun.
If you end up short at the end of the month, use that shortcoming as a basis to change the following month's behaviour. For example, if the shortcoming is, say, £40, you might think again about buying a £2 cup of coffee every day on the way to work. Alternatively, come up with a way of earning an extra £40.